Horngren 6e Tif Ch15

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Chapter 15 Cost Allocation: Joint Products and Byproducts

15.1 Distinguish among different types of saleable products, scrap and toxic waste.

1) Joint costs are incurred beyond the split off point and are assignable to individual products. Answer: FALSE

Diff: 2 Type: TF Skill: Knowledge Objective: LO 15-1

2) A byproduct has a minimal sales value. Answer: FALSE

3) Scrap frequently has a zero sales value. Answer: TRUE

4) There are no logical reasons for allocating joint costs. Answer: FALSE

5) Separable costs are assignable after the splitoff point. Answer: TRUE

6) Separable costs include manufacturing costs only. Answer: FALSE

Explanation: Separable costs include manufacturing, marketing, distribution, and other costs. Diff: 2 Type: TF

Skill: Knowledge Objective: LO 15-1

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8) The juncture in a joint production process when two products become separable is the byproduct point. Answer: FALSE

Explanation: The juncture in a joint production process when two products become separable is the splitoff point.

9) The products of a joint production process that have low total sales values compared with the total sales value of the main product are called joint products.

Answer: FALSE

Explanation: They are called byproducts. Diff: 1 Type: TF

10) If the value of a byproduct rises significantly, it could also be viewed as a joint product. Answer: TRUE

Diff: 1 Type: TF Skill: Comprehension Objective: LO 15-1

11) What type of cost is the result of an event that results in multiple products simultaneously? A) byproduct cost

B) joint cost C) main cost D) separable cost E) split off cost Answer: B

Diff: 2 Type: MC Skill: Comprehension Objective: LO 15-1

12) Costs which are assignable beyond the split off point at which individual products emerge are called A) byproduct cost.

B) joint cost. C) main cost. D) separable cost. E) split off costs. Answer: D

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13) When a single manufacturing process yields two products, one of which has a relatively high sales value compared to the other, the two products are respectively known as

A) joint products and byproducts. B) joint products and scrap. C) main products and byproducts. D) main products and joint products. E) byproducts and scrap.

Answer: C

14) Byproducts and scrap are differentiated by A) number of units per processing period. B) weight or volume of outputs per period. C) management preference only.

D) the amount of sales value per unit. E) the amount of costs assigned to each unit. Answer: E

15) Which of the following is FALSE concerning manufacturing of joint products and joint costing? A) The number of outputs produced may exceed the number of products.

B) An output from the process may be recycled without any value being added by its production. C) Some outputs from a joint process have no value and are not recognized in the accounting system. D) The physical quantity of outputs not recognized in the accounting system, can exceed the quantities of outputs that recognized in the accounting system.

E) Joint processes always yield either scrap or byproducts. Answer: E

16) All of the following changes may indicate a change in product classification of a manufacturing process which has a split off point EXCEPT

A) scrap items increase in sales value. B) a main product becomes a joint product.

C) a main product becomes technologically obsolete. D) a byproduct loses its market due to a new invention. E) a byproduct increases in market value.

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17) Products with a zero sales value are known as A) scrap. B) main products. C) joint products. D) byproducts. E) separable products. Answer: A Diff: 1 Type: MC Skill: Comprehension Objective: LO 15-1

18) Which of the following statements is true regarding main products, byproducts, and scrap? A) Product classifications do not change over the short-run.

B) Product classifications do not change over the long-run. C) Product classifications may change over time.

D) The cause-and-effect criterion determines the classification.

E) The distinctions between main products, byproducts, and scrap are well-established in practice. Answer: C

19) Which of the following is NOT a reason to allocate joint cost? A) rate regulation requirements, if applicable

B) cost of goods sold computations

C) insurance settlement cost information requirements D) customer profitability analysis

E) cause-and-effect analysis Answer: E

20) Assigning joint costs when only a portion of a business's products are sold to a single customer is an example of which of the following?

A) inventory costing for external financial statements B) customer profitability analysis

C) rate regulation requirements D) price regulation

E) cost reimbursement Answer: E

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21) A business which enters into a contract to purchase a product (or products) and will compensate the manufacturer under a cost reimbursement formula, should take an active part in the determination of how joint costs are allocated because

A) the manufacturer will attempt to allocate as large a portion of its costs to these products.

B) if the manufacturer successfully allocates a large portion of its costs to these products then it will be able to sell its other nonreimbursed products at lower prices.

C) the CICA requires the business to participate in the cost allocation process. D) Both A and B are correct.

E) Both A and C are correct. Answer: D

22) Proper joint cost allocations for inventory costing and cost-of-goods-sold computations are important because

A) inventory costing is essential for proper balance sheet presentation. B) divisional profitability may affect compensation for divisional managers.

C) cost of goods sold is an important component in the determination of net income. D) the information may be required for insurance settlement or litigation.

E) All of the above are correct. Answer: E

23) Identify each item on the following list as a joint cost or a separable cost. a. Cost of processing crude oil in a gasoline refinery.

b. Cost of processing timber (trees) at a sawmill.

c. Cost of processing lumber into different lengths and sizes at a sawmill.

d. Cost of raw tomato processing, tomatoes are to be used for different soups in a soup plant. e. Cost of canning soup in a soup plant.

f. Cost of moulding plastic for use in making different toys on an assembly line. g Cost of refining gasoline for use in automobiles.

h. Cost of processing water for human consumption. i. Cost of processing pulp into paper.

j. Cost of processing pulp into cardboard. Answer:

a. joint cost f. joint cost b. joint cost g. separable cost c. separable cost h. separable cost

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24) In each of the following industries, identify possible joint (or severable) products at the splitoff point. a. Coal b. Petroleum c. Dairy d. Lamb e. Lumber f. Cocoa Beans g. Christmas Trees h. Salt i. Cowhide Answer:

a. Coke, Gas, Benzole, Tar, Ammonia b. Crude Oil, Gas, Raw LPG

c. Milk, Butter, Cheese, Ice Cream, Skim Milk d. Lamb Cuts, Tripe, Hides, Bones, Fat e. Board, Newsprint, Shavings, Chips, etc. f. Cocoa Butter, Cocoa Powder, Cocoa Shells g. Christmas Trees, Wreaths, Decorations h. Hydrogen, Chlorine, Caustic Soda i. Leather, Suede, Chew Toys Diff: 1 Type: SA

Skill: Comprehension Objective: LO 15-1

25) For each of the following items tell whether it is a main product, joint product, byproduct, or scrap. Assume traditional situations.

a. Bones from a butcher shop b. Sawdust from a sawmill

c. Sawdust from a furniture manufacturer d. Fuel oil from petroleum processing e. Salt from a salt works process f. Broth from cooking food g. Raw milk for dairy processing h. Skim milk from dairy processing Answer:

a. scrap b. byproduct c. scrap

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Objective: LO 15-1

26) List three reasons why we allocate joint costs to individual products or services. Give an example of when the particular cost allocation reason would come into use.

Answer:

a. For inventory costing, and cost of goods sold computations for financial accounting purposes.

Example: Cost of goods sold and ending inventory valuation is necessary for reports to shareholders and for the inland revenue service.

b. For internal costing and cost of goods sold computations for internal reporting purposes. Example: These computations are necessary for division profitability analysis. c. Reimbursement under contracts.

Example: A firm produces multiple products or services—and uses the same resources and facilities to produce the products or services. But not all the firm's products are under the contract. The firm must allocate the cost of these shared facilities or resources to reflect the portion used by the product under the contract.

d. Insurance settlement computations.

Example: Where a business with multiple products or services claim losses under an insurance policy and wants to calculate the loss. The insurance company and the insured must agree on the value of the loss. e. Rate regulation. When companies are subject to rate regulation, the allocation of joint costs can be a significant factor in determining the regulated rates.

Example: Crude oil and natural gas are produced out of a common well. Diff: 1 Type: SA

27) What are a joint cost and a splitoff point?

Answer: A joint cost is the cost of a single production process that yields multiple products

simultaneously. The splitoff point is the juncture in a joint production process when the products become separately identifiable.

Diff: 2 Type: SA Skill: Comprehension Objective: LO 15-1

28) Explain the difference between a joint product and a byproduct. Can a byproduct ever become a joint product?

Answer: The differentiating factor between a joint product and a byproduct is the sales value at the splitoff point. Joint products have high total sales value at the splitoff point. A byproduct has a low total sales value at the splitoff point. Products can change from byproducts to joint products when their total

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29) What are separable costs?

Answer: Separable costs are costs incurred beyond the split-off point on identifiable products. Diff: 1 Type: SA

30) Golden Company uses one raw material, gold ore, for all its products. It spends considerable time getting the gold from the ore before it starts the actual processing of the finished products, rings, lockets, etc. Traditionally, the company made one product at a time and charged the product with all costs of production, from ore to final inspection. However, in recent months the cost accounting reports have been somewhat disturbing to management. It seems that some of the finished products are costing more than they should, even to the point of approaching their retail value. It has been noted by the accounting manager that this problem began when the company started buying ore from different parts of the world, some of which requires difficult extraction methods.

Required:

Can you explain how the company might change its accounting system to better reflect the reporting problems? Are there other problems with the purchasing area?

Answer: It appears that the company needs to start assigning all extraction costs to a joint cost category. It is unfair that the finished products receive a high cost simply because a certain batch of ore was very expensive to run through the extraction process when the next finished products were produced from gold that was easy to extract.

If all extraction costs are considered joint, then each finished product would share in the average cost of extraction, rather than being charged with the cost of a specific batch. This should result in costs that are more reflective of the product's actual cost.

Additional problems may be with the purchasing department. The accounting may help highlight the problem but does not pinpoint the actual problem. Maybe they should buy refined gold or else hire experts in the minerals area as part of the purchasing team.

Diff: 2 Type: ES Skill: Application Objective: LO 15-1

31) How should toxic waste be accounted for?

Answer: Toxic waste has negative revenue and should be added to the joint costs of production prior to allocation to main, joint or byproducts.

Diff: 2 Type: ES Skill: Comprehension Objective: LO 15-1

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15.2 Analyze the physical measure and sales value at splitoff methods to allocate joint

costs.

1) The cause-and-effect criterion is not present when joint costing is used. Answer: TRUE

2) It is easier to cost inventory if the joint products are sold before the split off point without further processing.

Answer: FALSE Diff: 2 Type: TF Skill: Knowledge Objective: LO 15-2

3) The sales value at split off method allocates joint costs according to each product's value, at the split off point, of the total production in the accounting period of each product.

Answer: TRUE Diff: 2 Type: TF Skill: Knowledge Objective: LO 15-2

4) The sales value at split off method can be used to value inventory as well as determining cost of goods sold.

5) One problem with the physical measure method of allocation is that the physical weights used for allocating joint costs may have no relation to the product's ability to produce revenue.

6) A major deficiency of the sales value at splitoff method is that this method does not allow management to obtain individual product costs and gross-margin information.

Answer: FALSE

Explanation: The sales value at splitoff method enables the accountant to obtain individual product costs and gross margins.

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7) An advantage of the physical-measure method is that obtaining physical measures for all products is an easy task.

Answer: FALSE

Explanation: For some products such as gas, obtaining physical measures is difficult. Diff: 2 Type: TF

8) Chem Manufacturing Company processes direct materials up to the split off point, where two products (X and Y) are obtained and sold. The following information was collected for the month of November. Direct materials processed:

10,000 litres (10,000 litres yield 9,500 litres of good product and 500 litres of shrinkage) Production: X 5,000 litres Y 4,500 litres

Sales: X 4,750 at $150 per litre Y 4,000 at $100 per litre

The cost of purchasing 10,000 litres of direct materials and processing it up to the split off point to yield a total of 9,500 litres of good products was $975,000.

The beginning inventories totalled 50 litres for X and 25 litres for Y. Ending inventory amounts reflected 300 litres of product X and 525 litres of product Y. October costs per unit were the same as November. What is the approximate amount of joint costs in Product Y's ending inventory if the physical volume method is used and the company uses the FIFO inventory method?

A) $50,917 B) $53,883 C) $60,145 D) $60,285 E) $67,358 Answer: B Explanation: B) $975,000 ∗ 4,500/9,500 = $461,842; $461,842/4,500 litres = $102.63 × 525 = $53,883 Diff: 3 Type: MC Skill: Comprehension Objective: LO 15-2

9) All of the following methods may be used to allocate joint costs EXCEPT A) the constant gross-margin percentage NRV method.

B) the estimated net realizable value method. C) the present-value allocation method. D) the sales value at split off method.

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10) Which of the following is NOT a strategy for costing inventory when joint-cost circumstances are involved?

A) Allocate costs according to the market selling-price. B) Allocate costs based on constant gross margin.

C) Allocate costs according to a predetermined physical measure. D) Use the estimated net realizable value.

E) Aallocate costs according to the amount in the respective cost pools. Answer: E

11) Which of the following statements is true in regard to the cause-and-effect relationship between allocated joint costs and individual products?

A) A high individual product value results in a high level of joint costs. B) A low individual product value results in a low level of joint costs. C) A high individual product value results in a low level of joint costs.

D) The cause-and-effect relationship depends on the relative costs to be incurred after split off. E) There is no cause-and-effect relationship.

Answer: E

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Use the information below to answer the following question(s).

Raynor Manufacturing purchases trees from Tree Nursery and processes them up to the split off point, where two products (paper and pencil casings) are obtained. The products are then sold to an

independent company that markets and distributes them to retail outlets. The following information was collected for the month of October.

Trees processed:

50 trees (yield is 30,000 sheets of paper and 30,000 pencil casings and no scrap) Production:

Paper 30,000 sheets pencil casings 30,000 Sales:

Paper 29,000 at $0.04 per page pencil casings 30,000 at $0.10 per casing

Cost of purchasing 50 trees and processing them up to the split off point to yield 30,000 sheets of paper and 30,000 pencil casings is $1,500.

Raynor Manufacturing's accounting department reported no beginning inventories; however, ending inventory amounts reflected 1,000 sheets of paper in stock.

12) What is the paper's sales value at the split off point? A) $120 B) $1,160 C) $1,200 D) $1,950 E) $3,000 Answer: C

Explanation: C) Paper: 30,000 sheets × $0.04 = $1,200.00 Diff: 1 Type: MC

Skill: Application Objective: LO 15-2

13) What are the pencil casings' sales value at the split-off point? A) $300

B) $1,480 C) $3,000 D) $3,750

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14) What are the paper's and the pencil's approximate weighted cost proportions using the sales value at split off method, respectively?

A) 28.57% and 71.43% B) 33.33% and 66.67% C) 40% and 60% D) 49.00% and 51.00% E) 50.00% and 50.00% Answer: A Explanation: A) $1,200 + 3,000 = $4,200 $1,200 / $4,200 = 28.57% $3,000 / $4,200 = 71.43% Diff: 2 Type: MC Skill: Comprehension Objective: LO 15-2

15) What are the approximate joint costs assigned to the paper ending inventory if joint costs are allocated using the sales value at split off method?

A) $14.29 B) $50.00 C) $428.55 D) $435.00 E) $750.00 Answer: A Explanation: A) 28.57% × $1,500 × 1,000/30,000 = $14.29 Diff: 3 Type: MC Skill: Comprehension Objective: LO 15-2

16) What is the approximate cost assigned to the pencil casings if joint costs are allocated using the sales value at split off method?

A) $750 B) $765 C) $1,005 D) $1,071 E) $1,500 Answer: D Explanation: D) 71.43% × $1,500 = $1,071.45 Diff: 2 Type: MC Skill: Comprehension Objective: LO 15-2

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17) What is the paper's production approximate cost per unit if the sales value at split off method is used? A) $0.0143 B) $0.0150 C) $0.0250 D) $0.0259 E) $0.0300 Answer: A Explanation: A) $429 / 30,000 sheets = $0.0143 Diff: 2 Type: MC Skill: Comprehension Objective: LO 15-2

18) What is the approximate production cost per unit for each pencil casing if the sales value at split off method is used? A) $0.0250 B) $0.0255 C) $0.0335 D) $0.0357 E) $0.0533 Answer: D Explanation: D) $1,071 / 30,000 casings = $0.0357 Diff: 2 Type: MC Skill: Comprehension Objective: LO 15-2

19) Two finished products, [A & B], are sold for $16 a unit and $24 a unit, respectively. Each product can also be sold at the split off point. Product A can be sold for $10 and Product B for $8. Joint costs for the two products totalled $8,000 for January for 600 units of A and 500 units of B.

What are the respective joint costs assigned to each unit of products A and B if the sales value at split off method is used? A) $5.92 and $8.88 B) $6.40 and $14.40 C) $6.40 and $9.10 D) $8.00 and $9.10 E) $8.00 and $6.40 Answer: E

Explanation: E) Total split off market value = (600 × $10) + (500 × $8) = $10,000 Product A = $6,000/$10,000 × $8,000 = $4,800/600 = $8.00

Product B = $4,000/$10,000 × $8,000 = $3,200/500 = $6.40 Diff: 2 Type: MC

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20) Which method allocates joint costs on the basis of each product's relative sales value at the split off point?

A) the constant gross-margin percentage NRV method B) the estimated net realizable value method

C) the physical measure method D) the sales value at split off method E) the split off method

Answer: D

Chem Manufacturing Company processes direct materials up to the split off point, where two products (X and Y) are obtained and sold. The following information was collected for the month of November. Direct materials processed:

The beginning inventories totalled 50 litres for X and 25 litres for Y. Ending inventory amounts reflected 300 litres of product X and 525 litres of product Y. October costs were per unit were the same as

November.

21) What are the respective physical volume proportions for products X and Y? A) 55.00% and 45.00% B) 54.00% and 46.00% C) 52.63% and 47.37% D) 47.37% and 53.63% E) 36.36 % and 63.64% Answer: C Explanation: C) X: 5,000 / 9,500 = 52.63% Y: 4,500 / 9,500 = 47.37% Diff: 1 Type: MC Skill: Comprehension Objective: LO 15-2

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22) What is the approximate portion of the joint costs that should be allocated to products X and Y, respectively, using a physical volume measure?

A) $461,858 and $513,142 B) $487,500 and $487,500 C) $513,142 and $461,858 D) $529,285 and $445,715 E) $530,000 and $470,000 Answer: C Explanation: C)

X: 52.63% × $975,000 = $513,142 (depends on rounding) Could be $513,158 Y: 47.37% × $975,000 = $461,858 (depends on rounding) Could be $461,842 Diff: 2 Type: MC

23) What is Product X's approximate production cost per unit using the physical volume method? A) $0.10 B) $10.23 C) $53.15 D) $55.00 E) $102.63 Answer: E Explanation: E) $513,142 / 5,000 litres = $102.63 Diff: 2 Type: MC Skill: Comprehension Objective: LO 15-2

24) What method is used when joint costs are allocated according to each item's relative proportion of weight at the split off point?

A) direct proportion method B) proportional value method C) physical measure method D) weighted sales value method E) constant margin method Answer: C

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25) An advantage of the sales value at split off method is A) the fact that it can be supported subjectively.

B) the fact that only a few assumptions are required beyond the split off point. C) the fact that there may not be a ready market at the split off point.

D) it always yields the same results as the gross margin percentage method. E) the cost allocation base is well understood.

Answer: E

November.

26) What is product Y's approximate joint production cost if the sales value at split off point method is used? A) $365,625 B) $419,250 C) $458,250 D) $600,000 E) $609,375 Answer: A

Explanation: A) Total value = (5,000 × $150) + (4,500 × $100) = $1,200,000 Product Y percentage = $450,000/$1,200,000 = 0.375

Cost allocated = $975,000 × 0.375 = $365,625 Diff: 2 Type: MC

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27) If joint products end up with the same gross margin percentage, which of the following is true? A) The cost allocation method assigned the same cost per unit to each product.

B) The physical measure method must have been used.

C) The gross margin percentage NRV method must have been used. D) The estimated net-realizable method must have been used.

E) If all products are sold at the split off point, and there were no opening inventories, the sales value at split off method could have been used.

Answer: E

28) Which of the following is FALSE concerning the physical measure method?

A) Technical personnel outside of accounting may be required in the joint costing determinations.

B) Using the benefits-received criterion, the physical measure method less preferred than the sales at split off method.

C) The physical measure may not reflect each individual product's ability to generate revenues.

D) Using a common physical measure can result in the product with the lowest revenue-producing power having the most costs assigned to it.

E) It results in a constant gross margin for all products. Answer: E

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29) What is product X's approximate gross margin percentage using the physical volume method? A) 30% B) 32% C) 33% D) 35% E) 38% Answer: B Explanation: B) Sales (4,750 × $150) $712,500 Cost of goods sold:

4,750 × $513,142/5,000 487,485 Gross margin $225,015

Gross margin percentage $225,015/$712,500 = 31.58% Diff: 2 Type: MC

Beverage Drink Company processes direct materials up to the split off point, where two products, A and B, are obtained. The following information was collected for the month of July:

Direct materials processed: 2,500 litres (with 20 percent shrinkage) Production: A 1,500 litres

B 500 litres Sales: A $15.00 per litre

B $10.00 per litre

Cost of purchasing 2,500 litres of direct materials and processing it up to the split off point to yield a total of 2,000 litres of good products was $4,500. There were no inventory balances of A and B.

Product A may be processed further to yield 1,375 litres of Product Z5 for an additional processing cost of $150. Product Z5 is sold for $25.00 per litre. There was no beginning inventory and ending inventory was 125 litres.

Product B may be processed further to yield 375 litres of Product W3 for an additional processing cost of $275. Product W3 is sold for $30.00 per litre. There was no beginning inventory and ending inventory was 25 litres.

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30) What is Product B's estimated sales value at the split off point? A) $3,500 B) $3,750 C) $4,500 D) $5,000 E) $8,250 Answer: D Explanation: D) 500 × $10 = $5,000 Diff: 2 Type: MC Skill: Application Objective: LO 15-2

31) In rate regulation settings, which method is usually preferred over the sales value method? A) constant gross-margin percentage NRV method

B) estimated net-realizable method C) physical measure method D) sales value at split off method E) rate regulation method Answer: C

32) Advantages of the sales value at split off method include all of the following EXCEPT A) it does not presuppose an exact number of subsequent steps for further processing. B) it uses a meaningful denominator.

C) there is no anticipation of subsequent management decisions. D) it is simple.

E) the allocation of joint costs could lead managers to make poor decisions. Answer: E

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33) The Arvid Corporation manufactures widgets, gizmos, and turnbols from a joint process. May production is 4,000 widgets; 7,000 gizmos; and 8,000 turnbols. Respective per unit selling prices at splitoff are $15, $10, and $5. Joint costs up to the splitoff point are $75,000. If joint costs are allocated based upon the sales value at splitoff, what amount of joint costs will be allocated to the widgets?

A) $30,882 B) $26,471 C) $17,647 D) $28,125 E) $60,000 Answer: B Explanation: B) $15 × 4,000 = $60,000 $10 × 7,000 = $70,000 $5 × 8,000 = $40,000 Total = $170,000 $60,000/$170,000 × $75,000 = $26,471 Diff: 2 Type: MC Skill: Application Objective: LO 15-2

34) Product X is sold for $8 a unit and Product Y is sold for $12 a unit. Each product can also be sold at the splitoff point. Product X can be sold for $5 and Product Y for $4. Joint costs for the two products totaled $4,000 for January for 600 units of X and 500 units of Y. What are the respective joint costs assigned each unit of products X and Y if the sales value at splitoff method is used?

A) $2.96 and $4.44 B) $4.00 and $4.55 C) $4.00 and $3.20 D) $4.55 and $4.55 E) $3.20 and $4.00 Answer: C Explanation: C)

Total splitoff market value = (600 × $5) + (500 × $4) = $5,000 Product X = $3,000/$5,000 × $4,000 = $2,400/600 = $4.00 Product Y = $2,000/$5,000 × $4,000 = $1,600/500 = $3.20 Diff: 2 Type: MC

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Answer the following question(s) using the information below.

The Oxnard Corporation processes a liquid component up to the splitoff point where two products, Mr. DirtOut and Mr. SinkClean, are produced and sold. There was no beginning inventory. The following material was collected for the month of January:

Production: Mr. DirtOut 147,500 litres

Mr. SinkClean 95,000 litres

Sales: Mr. DirtOut 140,500 at $110 per litre

Mr. SinkClean 91,000 at $100 per litre

The cost of purchasing 250,000 litres of direct materials and processing it up to the splitoff point to yield a total of 242,500 litres of good product was $380,000.

35) What are the physical-volume proportions to allocate joint costs for Mr. DirtOut and Mr. SinkClean, respectively? A) 59.00% and 41.00% B) 60.82% and 39.18% C) 39.18% and 60.82% D) 59.79% and 40.21% E) 41.00% and 59.00% Answer: B Explanation: B) Mr. DirtOut: 147,500/242,500 = 60.82% Mr. SinkClean: 95,000/242,500 = 39.18% Diff: 2 Type: MC Skill: Application Objective: LO 15-2

36) When using a physical-volume measure, what is the approximate amount of joint costs that will be allocated to Mr. DirtOut and Mr. SinkClean?

A) $231,116 and $148,884 B) $224,200 and $155,800 C) $227,202 and $152,798 D) $155,800 and $224,200 E) $148,884 and $231,116 Answer: A Explanation: A) $380,000 × (147,500 / 242,500) = $231,116; $380,000 × (95,000 / 242,500) = $148,884 Diff: 2 Type: MC

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37) When using the physical-volume method, what is Mr. DirtOut's approximate production cost per unit? A) $1.52 B) $1.54 C) $1.57 D) $1.61 E) $1.01 Answer: C Explanation: C) [$380,000 × (147,500 / 242,500)] / 147,500 = $1.57 Diff: 3 Type: MC Skill: Application Objective: LO 15-2

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Answer the following question(s) using the information below:

The Morton Company processes unprocessed goat milk up to the splitoff point where two products, condensed goat milk and skim goat milk result. The following information was collected for the month of October:

Production: condensed goat milk 26,100 litres skim goat milk 32,400 litres

Sales: condensed goat milk $3.50 per litre skim goat milk $2.50 per litre

The costs of purchasing the 65,000 litres of unprocessed goat milk and processing it up to the splitoff point to yield a total of 58,500 litres of salable product was $72,240. There were no inventory balances of either product.

Condensed goat milk may be processed further to yield 19,500 litres (the remainder is shrinkage) of a medicinal milk product, Xyla, for an additional processing cost of $3 per usable litre. Xyla can be sold for $18 per litre.

Skim goat milk can be processed further to yield 28,100 litres of skim goat ice cream, for an additional processing cost per usable litre of $2.50. The product can be sold for $9 per litre.

There are no beginning and ending inventory balances.

38) Using the sales value at splitoff method, what is the gross-margin percentage for condensed goat milk at the splitoff point?

A) 21.1% B) 55.1% C) 58.1% D) 38.2% E) 41.9% Answer: C

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Explanation: C)

Condensed Goat Milk Skim Goat Milk Total Revenues 26,100 × $3.50 = $91,350 32,400 × $2.50 = $81,000 $172,350 Percentage $91,350/$172,350 = 0.53 $81,000/$172,350 = 0.47 Joint costs allocated $72,240 × .53 = $38,287 $72,240 × .47 = $33,953 Gross margin $53,063 $47,047 GM percentage $53,063/$91,350 = 0.581 $47,047/$81,000 = 0.581 Diff: 3 Type: MC Skill: Application Objective: LO 15-2

39) Using the sales value at splitoff method, what is the gross-margin percentage for skim goat milk at the splitoff point? A) 21.1% B) 55.1% C) 58.1% D) 38.2% E) 41.9% Answer: C Explanation: C)

Condensed Goat Milk Skim Goat Milk Total Revenues 26,100 × $3.50 = $91,350 32,400 × $2.50 = $81,000 $172,350 Percentage $91,350/$172,350 = 0.53 $81,000/$172,350 = 0.47 Joint costs allocated $72,240 × .53 = $38,287 $72,240 × .47 = $33,953 Gross margin $53,063 $47,047 GM percentage $53,063/$91,350 = 0.581 $47,047/$81,000 = 0.581 Diff: 3 Type: MC Skill: Application Objective: LO 15-2

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Cranbrook Chemical Ltd. manufactures two industrial compounds. In the month of May, 15,000 litres of direct material costing $160,000 were processed at a cost of $400,000. The joint process yielded 16,000 containers of a compound known as Jarlon and 4,000 containers of a compound known as Kharton. The respective selling prices of Jarlon and Kharton are $38 and $58. Both products may be processed further. Jarlon may be processed into Jaxton at an incremental cost of $8 per jar of the final product while Kharton may be processed into Kraxton at an additional cost of $32 per jar of the final product. The volume of jars of the final product are: 12,000 and 3,000 for Jaxton and Kraxton respectively. The selling price of Jaxton is $48 per jar. The selling price of Kraxton is $102 per jar.

40) Using the sales value at split off method, the percentage weightings for joint cost allocations for Jarlon and Kharton respectively are:

A) 27.62% and 72.38% B) 80.00% and 20.00% C) 39.58% and 60.42% D) 72.38% and 27.62% E) 60.42% and 39.58% Answer: D

Explanation: D) Jarlon sales value at split off = 16,000 @ $38 = $608,000 Kharton sales value at split off = 4,000 @ $58 = $232,000

J = 608/[608+232] = 72.38%; K = 232/[608+232] = 27.62% Diff: 2 Type: MC

41) Using the physical measures method, the weightings for joint cost allocations for Jarlon and Kharton respectively are: A) 27.62% and 72.38% B) 80.00% and 20.00% C) 39.58% and 60.42% D) 72.38% and 27.62% E) 60.42% and 39.58% Answer: B

Explanation: B) Jarlon = 16,000/[16,000 + 4,000] = 80%; Kharton = 4,000/[16,000 + 4,000] = 20% Diff: 2 Type: MC

42) Using the sales value at split off method, the joint costs allocated to Jarlon would be: A) $289,520

B) $115,808 C) $405,328

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43) Using the sales value at split off method, the joint costs allocated to Kharton would be: A) $289,520 B) $115,808 C) $110,480 D) $154,672 E) $405,328 Answer: D

Explanation: D) Jarlon sales value at split off = 16,000 @ $38 = $608,000 Kharton sales value at split off = 4,000 @ $58 = $232,000

J = 608/[608 + 232] = 72.38%; K = 232/[608 + 232] = 27.62% 27.62% ∗ [$160,000 + $400,000] = $154,672

Diff: 2 Type: MC Skill: Application Objective: LO 15-2

44) Using the physical measures method, the joint costs allocated to Jarlon would be: A) $320,000 B) $112,000 C) $405,328 D) $448,000 E) $289,520 Answer: D

Explanation: D) Jarlon = 16,000/[16,000 + 4,000] = 80%; Kharton = 4,000/[16,000 + 4,000] 80% ∗ [$160,000 + $400,000] = $448,000

45) Using the physical measures method, the joint costs allocated to Kharton would be: A) $320,000 B) $112,000 C) $154,672 D) $448,000 E) $110,480 Answer: B

Explanation: B) Jarlon = 16,000/[16,000 + 4,000] = 80%; Kharton = 4,000/[16,000 + 4,000] 20% ∗ [$160,000 + $400,000] = $112,000

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46) Assuming Cranbrook uses the sales value at split off method and 2,000 containers of Jarlon and 75 containers of Kharton are unsold at the end of the period, Cranbrook would report ending inventory of: A) $38,272 B) $56,598 C) $53,560 D) $79,240 E) $58,100 Answer: C

Explanation: C) Jarlon sales value at split off = 16,000 @ $38 = $608,000 Kharton sales value at split off = 4,000 @ $58 = $232,000

J = 608/[608 + 232] = 72.38%; K = 232/[608 + 232] = 27.62%

Joint costs allocated are $405,328 and $154,672 for J and K respectively Unit costs are $405,328/16,000 = $25.33 for J

Units costs are $154,672/4,000 = $38.67 for K

Ending inventory = [$25.33 ∗ 2,000] + [$38.67 ∗ 75] = $50,660 + $2,900 = $53,560 Diff: 2 Type: MC

47) Assuming Cranbrook uses the physical measures method and 2,000 containers of Jarlon and 75 containers of Kharton are unsold at the end of the period, Cranbrook would report cost of goods sold of: A) $58,100 B) $506,400 C) $358,500 D) $143,400 E) $501,900 Answer: E

Explanation: E) Jarlon = 16,000/[16,000 + 4,000] = 80%; Kharton = 4,000/[16,000 + 4,000] = 20% 80% ∗ [$160,000+$400,000] = $448,000 for Jarlon $448,000/16,000 = $28 per container

16,000 - 2,000 = 14,000 units sold of J; 4,000 - 75 = 3,925 units sold of K 20% 8 $560,000 = $112,000 for Kharton $112,000/4,000 = $28 per container Total Cost of goods sold = [14,000 units ∗ $28] + [3,925 ∗ $28] = $501,900 Diff: 2 Type: MC

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48) Sweet Sugar Company processes sugar beets into three products. During April the joint costs of processing were $240,000. Production and sales value information for the month were as follows: Sales Value at

Units Split off Separable Product Produced Sales Value Costs

Sugar 12,000 $80,000 $24,000

Sugar syrup 8,000 $70,000 $64,000 Fructose syrup 4,000 $50,000 $32,000 Required:

Determine the amount of joint cost allocated to each product if the sales value at split off method is used. Answer:

Product Units Sales Value Percent Joint cost allocated Sugar 12,000 $80,000 40% × $240,000 $96,000 Sugar syrup 8,000 70,000 35 × 240,000 84,000 Fructose syrup 4,000 50,000 25 × 240,000 60,000 Total $200,000 100% $240,000 Diff: 2 Type: SA Skill: Application Objective: LO 15-2

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49) BC Lumber processes timber into four products. During January the joint costs of processing were $280,000. There was no beginning inventory at the beginning of the month. Production and sales value information for the month were as follows:

Sales Value at

Product Boardmetres Split off Point Ending Inventory 2 × 4's 6,000,000 $0.30 per boardmetre 500,000 boardmetre 2 × 6's 3,000,000 0.40 per boardmetre 250,000 boardmetre 4 × 4's 2,000,000 0.45 per boardmetre 100,000 boardmetre slabs 1,000,000 0.10 per boardmetre 50,000 boardmetre Required:

Determine the value of ending inventory if the sales value at split off method is used for product costing. Round to 3 decimal places when necessary.

Answer:

Product Boardmetres Sales value % Joint Cost Allocated 2 × 4's 6,000,000 $1,800,000 45.0% × 280,000= $126,000 2 × 6's 3,000,000 1,200,000 30.0% × 280,000= 84,000 4 × 4's 2,000,000 900,000 22.5% × 280,000= 63,000 slabs 1,000,000 100,000 2.5% × 280,000= 7,000 Totals 12,000,000 $4,000,000 100.0% $280,000 Product Fraction of prod. in inventory Allocated Inventory value 2 × 4's 500,000/6,000,000 × $126,000 = $10,500 2 × 6's 250,000/3,000,000 × 84,000 = 7,000 4 × 4's 100,000/2,000,000 × 63,000 = 3,150 slabs 50,000/1,000,000 × 7,000 = 350 Total $21,000 Diff: 3 Type: SA Skill: Application Objective: LO 15-2

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50) CSI Chemical, Inc. processes pine rosin into three products; turpentine, paint thinner, and spot remover. During May the joint costs of processing were $240,000. Production and sales value information for the month were as follows:

Product Units Produced Sales Value at Split off Point Turpentine 3,000 litres $30,000

Paint thinner 3,000 litres 25,000 Wood alcohol 1,500 litres 12,500 Required:

Determine the amount of joint cost allocated to each product if the physical measure method is used. Answer:

Product Units produced Percentage Joint costs Allocated Turpentine 3,000 litres 40% × $240,000 = $96,000 Paint thinner 3,000 litres 40 × 240,000 = 96,000 Spot remover 1,500 litres 20 × 240,000 = 48,000

Totals 7,500 litres 100% $240,000

Diff: 2 Type: SA Skill: Application Objective: LO 15-2

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51) Peachland Fruit Ltd. harvests blueberries. After harvest, the company sells some berries fresh, freezes others and processes some into juice. During the summer the joint costs of processing the berry products were $620,000. Any separable costs for each product are negligible and are not traced. There was no beginning or ending inventories for the summer. Production and sales value information for the summer were as follows:

Sales Value at

Product Units Split off Point Juice 200,000 litres $6 per litre Fresh 300,000 kilograms $8 per kilogram Frozen 400,000 kilograms $5 per kilogram Required:

Determine the amount allocated to each product if the sales value at split off method is used and compute the cost per case for each product.

Answer:

Product Calculation SV Percentage Allocation Juice 200,000 @ $6 $1,200,000 21.43% $132,866 Fresh 300,000 @ $8 2,400,000 42.86% $265,732 Frozen 400,000 @ $5 2,000,000 35.71% $221,402

Totals $5,600,000 100.00% $620,000

Product Costs per unit

Juice $132,866/200,000 litres = $0.66/litre

Fresh $265,732/300,000 kilograms = $0.89/kilogram Frozen $221,402/400,000 = $0.55/kilogram

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52) BC Lumber processes timber into four products. During January the joint costs of processing were $280,000. There was no beginning inventory at the beginning of the month. Production and sales value information for the month were as follows:

Sales Value at

Product Boardmetres Split off Point Ending Inventory 2 × 4's 6,000,000 $0.30 per boardmetre 500,000 boardmetre 2 × 6's 3,000,000 0.40 per boardmetre 250,000 boardmetre 4 × 4's 2,000,000 0.45 per boardmetre 100,000 boardmetre slabs 1,000,000 0.10 per boardmetre 50,000 boardmetre Required:

Determine the value of ending inventory if the physical measures method is used for product costing. Round to 3 decimal places when necessary.

Answer:

Product Boardmetres Weighting % Joint Cost Allocated 2 × 4's 6,000,000 6,000/12,000 50.0% × 280,000 = $140,000 2 × 6's 3,000,000 3,000/12,000 25.0% × 280,000 = 70,000 4 × 4's 2,000,000 2,000/12,000 16.67% × 280,000 = 46,676 slabs 1,000,000 1,000/12,000 8.33% × 280,000 = 23,324 Totals 12,000,000 $4,000,000 100.0% $280,000 Product Fraction of prod. in inventory Allocated Inventory value 2 × 4's 500,000/6,000,000 × $140,000 = $11,667 2 × 6's 250,000/3,000,000 × 70,000 = 5,833 4 × 4's 100,000/2,000,000 × 46,676 = 2,334 slabs 50,000/1,000,000 × 23,324 = 1,166 Total $21,000 Diff: 3 Type: SA Skill: Application Objective: LO 15-2

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53) CSI Chemical, Inc. processes pine rosin into three products; turpentine, paint thinner, and spot remover. During May the joint costs of processing were $240,000. Production and sales value information for the month were as follows:

Product Units Produced Sales Value at Split off Point Turpentine 3,000 litres $30,000

Paint thinner 3,000 litres 25,000 Wood alcohol 1,500 litres 12,500 Required:

Determine the amount of joint cost allocated to each product if the sales value at split off method is used. Answer:

Product Sales Value Percentage Joint costs Allocated Turpentine $30,000 44.44% × $240,000 = $106,667 Paint thinner $25,000 37.04% × 240,000 = 88,889 Spot remover $12,500 18.52% × 240,000 = 44,444

Totals $67,500 100% $240,000

Explanation: Note solution shows full percentage decimal places i.e. $30/67.5 ∗ $240,000 = $106,667 If two decimal places are used for percentages, the numbers are $106,656, $88,896 and $44,448. Diff: 2 Type: SA

54) List the reasons that the sales value at splitoff method of joint cost allocation should be used. Answer:

1. Measurement of the value of the joint products at splitoff - Sales value at splitoff is the best measure of the benefits received as a result of joint processing.

2. No anticipation of subsequent management decisions - This method does not require information on processing steps after splitoff.

3. Availability of a common basis to allocate joint costs to products - Revenue is the common basis to allocate costs.

4. Simplicity - It is the simplest method compared to the NRV and constant gross-margin percentage NRV methods.

Diff: 3 Type: SA Skill: Comprehension Objective: LO 15-2

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55) Wharf Fisheries processes many of its seafood items to the demands of its largest customers, most of which are large retail distributors. To keep the accounting system simple it has always assigned cost by the weight of the finished product. However, with increased competition it has had to watch its prices closely and in recent years several items have incurred zero profit margins. After several weeks of investigation, your consulting firm has found that while weight is important in processing of seafood, numerous items have very distinct processing steps and some items are processed through more steps than others.

Required:

Based on the findings of your consulting firm, what changes might you recommend to the company in the way of cost allocation among its products?

Answer: Recommendations might include, among others, some of the following:

a. Categorize the fishing expeditions as joint costs, especially if multiple items are caught. b. Categorize all processing activities where multiple items are processed as joint costs.

c. For those processes that are unique to only one product, or a set of products, use separable cost categories.

d. Choose something other than weight. Select one of the value methods of assigning the costs. e. Carefully separate main products from byproducts in the costing system.

f. Do not allocate the joint costs for internal decisions. Diff: 2 Type: ES

56) Paragon University operates an extensive and an expensive registration, testing, and counselling centre, through which all students are required to pass through when they enter the university. The registration effort's costs (for the most part) are almost impossible to allocate based upon which students require time, effort, etc. The cost of this centre is approximately 15% of the total costs of Paragon. This department engages in no other activities than the registration of students. Paragon is interested in determining the profitability of the three technical departments it operates. Paragon has the perception that some departments are more profitable than others, and it would like to determine an appropriate method of allocating the costs of this registration centre.

Required:

Recommend to Paragon University a method (or methods) of allocating the costs of registration to the three departments.

Answer: The joint costs of the registration effort could be allocated based on physical volume or the sales (tuition) dollars of each department.

Volume Allocating on volume would be based not upon physical measures, but upon the number of credit

hours each of the three departments offer each semester. If the ratio of credit hours for the three departments were 25%, 45%, and 30% then the costs would be allocated based upon these ratios.

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15.3 Evaluate two different market-based cost allocation methods to identify which is

most appropriate to decide whether to sell at splitoff or process further.

1) The method of allocating joint product costs is an important guide for other management decisions. Answer: FALSE

2) The estimated net realizable value method allocates joint costs on the basis of the expected final sales value in the ordinary course of business, less the expected separable costs of production and marketing of the total production for the period.

3) The net realizable value method can be used for products for which there may not be any market price available at split off.

4) Net realizable value generally means expected sales value plus expected separable costs. Answer: FALSE

Explanation: Net realizable value is expected sales value minus expected separable costs. Diff: 1 Type: TF

5) A company can alter its total gross margin through its selection of joint cost allocation methods. Answer: FALSE

Explanation: Individual product margins are affected, not the total company. Diff: 1 Type: TF

6) The net realizable value method is generally used for products or services that are processed and after splitoff additional value is added to the product and a selling price can be determined.

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7) The constant gross-margin percentage method differs from market-based joint-cost allocation method (sales value at splitoff and estimated net realizable value) since no account is taken of profits earned before or after the splitoff point when allocating joint costs.

Answer: FALSE

Explanation: The constant gross-margin percentage method takes account of the profits earned before or after the splitoff when allocating joint costs.

Diff: 2 Type: TF Skill: Comprehension Objective: LO 15-3

8) A criticism of the practice of carrying inventories at estimated net realizable values is that this practice recognizes income before sales are made.

Answer: TRUE Diff: 2 Type: TF Skill: Comprehension Objective: LO 15-3

9) The constant gross-margin percentage NRV method allocates joint costs to joint products in such a way that the gross margin on each joint product is the same as it was in the previous year.

Answer: FALSE

Explanation: The constant gross-margin percentage NRV method allocates joint costs to joint products in such a way that the overall gross margin percentage is identical for the individual products.

10) The decision of whether to process products beyond the split off process should be based on which of the following?

A) revenue analysis B) relevant cost analysis C) production cost analysis D) gross margin analysis

E) incremental operating income attainable beyond the split off point Answer: E

11) The estimated net realizable method allocates joint costs on the basis of A) expected final sales value less separable costs of production and marketing. B) value added after the split off point.

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Beverage Drink Company processes direct materials up to the split off point, where two products, A and B, are obtained. The following information was collected for the month of July:

Direct materials processed: 2,500 litres (with 20 percent shrinkage) Production: A 1,500 litres

B 500 litres Sales: A $15.00 per litre

B $10.00 per litre

Cost of purchasing 2,500 litres of direct materials and processing it up to the split off point to yield a total of 2,000 litres of good products was $4,500. There were no inventory balances of A and B.

Product A may be processed further to yield 1,375 litres of Product Z5 for an additional processing cost of $150. Product Z5 is sold for $25.00 per litre. There was no beginning inventory and ending inventory was 125 litres.

Product B may be processed further to yield 375 litres of Product W3 for an additional processing cost of $275. Product W3 is sold for $30.00 per litre. There was no beginning inventory and ending inventory was 25 litres.

12) What are the expected final sales values of production if Product Z5 and Product W3 are produced? A) $11,250 and $34,375 B) $22,500 and $5,000 C) $31,250 and $10,500 D) $34,375 and $10,500 E) $34,375 and $11,250 Answer: E Explanation: E) Z5 = 1,375 litres × $25 = $34,375 W3 = 375 litres × $30 = $11,250 Diff: 2 Type: MC Skill: Application Objective: LO 15-3

13) What is Product Z5's estimated net realizable value? A) $11,100

B) $22,350 C) $34,225

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14) What is Product Z5's and Product W3's respective production cost per unit, assuming the company allocates joint costs on the basis of net realizable value?

A) $2.05 and $3.88 B) $2.50 and $2.88 C) $2.60 and $2.88 D) $2.60 and $3.61 E) $2.86 and $3.68 Answer: D Explanation: D) Weight (34,225 / 45,200) = 76% (10,975 / 45,200) = 24% Joint Cost: 0.76 × $4,500 = $3,420 0.24 × $4,500 = $1,080 Prod. Cost/unit: [($3,420 + 150) / 1,375] = $2.60 [($1,080 + 275) / 375] = $3.61 Diff: 2 Type: MC Skill: Application Objective: LO 15-3

15) Which of the following methods allocates joint costs according to the appraised final sales value in the ordinary course of business less the appraised separable costs of production and marketing?

A) constant gross-margin percentage NRV method B) estimated net-realizable method

C) physical measure method D) sales value at split off method E) split off appraisal method Answer: B

16) Which of the following methods calculates expected profits before any costs are allocated? A) sales value at split off method

B) physical measure method C) expected profits method

D) estimated net-realizable method

E) constant gross margin percentage NRV method Answer: E

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17) All of the following statements about the constant gross margin percentage net-realizable method are true EXCEPT

A) all products have equal gross margin percentages. B) it is based on a tenuous underlying assumption.

C) the gross margin percentage remains the same regardless of the different amounts of separable costs. D) the gross margin is calculated by deducting all separable costs from revenue.

E) some products may receive negative allocations of joint costs. Answer: D

18) Which of the following statements is true concerning the practice of carrying inventories at NRV? A) It is an inevitable result of joint cost allocation.

B) It results for the NRV method of joint cost allocation. C) It results from the constant gross margin NRV method. D) It is a widely-accepted practice.

E) It results in income recognition before sales are made. Answer: E

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Answer the following question(s) using the information below:

The Morton Company processes unprocessed goat milk up to the splitoff point where two products, condensed goat milk and skim goat milk result. The following information was collected for the month of October:

Production: condensed goat milk 26,100 litres skim goat milk 32,400 litres

Sales: condensed goat milk $3.50 per litre skim goat milk $2.50 per litre

The costs of purchasing the 65,000 litres of unprocessed goat milk and processing it up to the splitoff point to yield a total of 58,500 litres of salable product was $72,240. There were no inventory balances of either product.

Condensed goat milk may be processed further to yield 19,500 litres (the remainder is shrinkage) of a medicinal milk product, Xyla, for an additional processing cost of $3 per usable litre. Xyla can be sold for $18 per litre.

Skim goat milk can be processed further to yield 28,100 litres of skim goat ice cream, for an additional processing cost per usable litre of $2.50. The product can be sold for $9 per litre.

There are no beginning and ending inventory balances.

19) What is the estimated net realizable value of Xyla at the splitoff point? A) $182,650 B) $252,900 C) $292,500 D) $351,000 E) $280,750 Answer: C Explanation: C)

XYLA Skim Goat Total

Sales 19,500 × $18 = $351,000 28,100 × $9 = $252,900 $603,900 Less: Sep cost 19,500 × $3 = $58,500 28,100 × $2.50 = $70,250

Est. NRValue $292,500 $182,650 $475,150

Weighting .6156 .3844

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20) What is the estimated net realizable value of the skim goat ice cream at the splitoff point? A) $182,650 B) $252,900 C) $110,200 D) $85,450 E) $194,400 Answer: A Explanation: A)

Est. NRValue $292,500 $182,650 $475,150 Weighting .6156 .3844 Jt costs allocated $72,240 × .6156 = $44,471 $72,240 × .3844 = $27,769 Diff: 3 Type: MC Skill: Application Objective: LO 15-3

21) Using estimated net realizable value, what amount of the $72,240 of joint costs would be allocated Xyla and the skim goat ice cream?

A) $41,971 and $30,269 B) $44,471 and $27,769 C) $32,796 and $39,444 D) $36,120 and $36,120 E) $39,444 and $32,796 Answer: B Explanation: B)

Est. NRValue $292,500 $182,650 $475,150 Weighting .6156 .3844 Jt costs allocated $72,240 × .6156 = $44,471 $72,240 × .3844 = $27,769 Diff: 3 Type: MC Skill: Application Objective: LO 15-3

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22) How much (if any) extra income would Morton earn if it produced and sold all of the Xyla from the condensed goat milk? Allocate joint processing costs based upon relative sales value on the splitoff. (Extra income means income in excess of what Morton would have earned from selling condensed goat milk.) A) $53,063 B) $254,213 C) $201,150 D) $96,787 E) $259,650 Answer: C

Explanation: C) Incremental Revenue = [19,500 ∗ $18] - [26,100 ∗ $3.50] = $351,000 - $91,350 = $259,650 Incremental Costs = [19,500 ∗ $3] = $58,500

Incremental Benefit = $259,650 - $58,500 = $201,150

Condensed Goat Milk Skim Goat Milk

Revenue $351,000 $252,900 Joint costs (38,287) (33,953) Process costs ($3 × 19,500) = (58,500) ($2.50 × 28,100) = (70,250) Revenue (net) 254,213 148,697 Gross margin (53,063) (47,047) Difference $201,150 $101,650 Diff: 3 Type: MC Skill: Analysis Objective: LO 15-3

23) How much (if any) extra income would Morton earn if it produced and sold skim milk ice cream from goats rather than goat skim milk? Allocate joint processing costs based upon the relative sales value at the splitoff point. A) $47,047 B) $117,297 C) $101,650 D) $70,250 E) $171,900 Answer: C

Explanation: C) Incremental Revenue = [28,100*$9] - [32,400 ∗ $2.50] = $252,900 - $81,000 = $171,900 Incremental Costs = [28,100 ∗ $2.50] = $70,250

Incremental Benefit = $171,900 - $70,250 = $101,650

Condensed Goat Milk Skim Goat Milk

Revenue $351,000 $252,900

Joint costs (38,287) (33,953)

Process costs ($3 × 19,500) = (58,500) ($2.50 × 28,100) = (70,250)

Revenue (net) 254,213 148,697

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24) The constant gross-margin percentage NRV method of joint cost allocation

A) involves allocating costs in such a way that maintaining the same gross margin percentage for each product that was obtained in prior years.

B) involves allocating costs in such a way that the overall gross margin percentage is identical for the individual products.

C) is the same as the estimated NRV method. D) is the same as the sales-value at splitoff method. E) will result in different gross margins for each product. Answer: B

Diff: 2 Type: MC Skill: Knowledge Objective: LO 15-3

25) Which method of allocating costs would be used if the selling prices of all products at the splitoff point are unavailable?

A) sales value at splitoff method B) NRV method

C) physical measures method

D) constant gross-margin percentage method E) reciprocal method

Answer: B

Diff: 2 Type: MC Skill: Knowledge Objective: LO 15-3

26) What is the reason that accountants do not like to carry inventory at net realizable value? A) NRV is the most difficult costing method.

B) NRV recognizes income after the sale is complete. C) NRV recognizes income before sales are made. D) NRV is acceptable to the taxing authorities. E) NRV is normally known.

Answer: C

Diff: 2 Type: MC Skill: Analysis Objective: LO 15-3

27) When a product is the result of a joint process, the decision to process the product past the splitoff point further should be influenced by the

A) total amount of the joint costs.

B) portion of the joint costs allocated to the individual products. C) extra revenue earned past the splitoff point.

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Cranbrook Chemical Ltd. manufactures two industrial compounds. In the month of May, 15,000 litres of direct material costing $160,000 were processed at a cost of $400,000. The joint process yielded 16,000 containers of a compound known as Jarlon and 4,000 containers of a compound known as Kharton. The respective selling prices of Jarlon and Kharton are $38 and $58. Both products may be processed further. Jarlon may be processed into Jaxton at an incremental cost of $8 per jar of the final product while Kharton may be processed into Kraxton at an additional cost of $32 per jar of the final product. The volume of jars of the final product are: 12,000 and 3,000 for Jaxton and Kraxton respectively. The selling price of Jaxton is $48 per jar. The selling price of Kraxton is $102 per jar.

28) Using the NRV method, the amount of joint costs allocated to Jaxton is: A) $170,408 B) $278,280 C) $121,720 D) $389,592 E) $111,312 Answer: D Explanation: D)

Jaxton net realizable value = [12,000*$48] - [12,000*$8] = $480,000 Kraxton net realizable value = [3,000 *$102] - [3,000*$32] = $210,000 J proportion = $480,000/[$480,000+$210,000] = 69.57%

K proportion = $210,000/[$480,000+$210,000] = 30.43% Joint costs allocated to J = .6957 ∗ $560,000 = $389,592 Joint costs allocated to K = .3043 ∗ $560,000 = $170,408 Diff: 3 Type: MC

29) Using the NRV method, the amount of joint costs allocated to Kraxton is: A) $170,408 B) $278,280 C) $121,720 D) $389,592 E) $111,312 Answer: A

Explanation: A) Jaxton net realizable value = [12,000 ∗ $48] - [12,000 ∗ $8] = $480,000 Kraxton net realizable value = [3,000 ∗ $102] - [3,000 ∗ $32] = $210,000

J proportion = $480,000/[$480,000+$210,000] = 69.57% K proportion = $210,000/[$480,000+$210,000] = 30.43% Joint costs allocated to J = .6957 ∗ $560,000 = $389,592 Joint costs allocated to K = .3043 ∗ $560,000 = $170,408 Diff: 3 Type: MC

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30) The incremental benefit or (loss) of processing Jarlon into Jaxton is: A) $480,000 B) ($128,000) C) $64,000 D) ($96,000) E) ($32,000) Answer: B Explanation: B) Incremental Revenues: [12,000 ∗ $48] - [16,000 ∗ $38] = $576,000 - $608,000 = ($32,000) Incremental Costs: [12,000 ∗ $8] = $96,000 Company loses $32,000 + $96,000 = $128,000 Diff: 3 Type: MC Skill: Application Objective: LO 15-3

31) The incremental benefit or (loss) of processing Kharton into Kraxton is: A) $74,000 B) $22,000 C) ($22,000) D) ($96,000) E) $170,000 Answer: C Explanation: C) Incremental Revenues: [3,000 ∗ $102] - [4,000 ∗ $58] = $306,000 - $232,000 =$74,000 Incremental Costs: [3,000 ∗ $32] = ($96,000) Company loses $74,000 - $96,000 = ($22,000) Diff: 3 Type: MC Skill: Application Objective: LO 15-3

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32) Green Paper Company processes wood pulp into two products. During January the joint costs of processing were $144,000. Production and sales value information for the month were as follows:

Sales Value at

Product Kilograms Produced Split off Point Separable Costs

Paper 130,000 $80,000 $224,000

Cardboard 108,000 70,000 264,000

Paper sells for $2.75 a kilogram and cardboard sells for $3.50 a kilogram.

There were no beginning inventories for April but ending inventories totalled 10,000 kilograms for paper and 12,000 kilograms for cardboard.

Required:

Prepare a product line income statement without allocation of joint costs. Answer:

Paper Cardboard Totals

Sales $330,000 $336,000 $666,000

Produced but not sold 27,500 42,000 69,500 Total sales value $357,500 $378,000 $735,500 Separable costs 224,000 264,000 488,000 Contribution margin $133,500 $114,000 $247,500 Joint costs 144,000 Gross margin $103,500 Diff: 2 Type: SA Skill: Application Objective: LO 15-3

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33) Green Paper Company processes wood pulp into two products. During January the joint costs of processing were $144,000. Production and sales value information for the month were as follows:

Sales Value at

Product Kilograms Produced Split off Point Separable Costs

Paper 130,000 $80,000 $224,000

Cardboard 108,000 70,000 264,000

Paper sells for $2.75 a kilogram and cardboard sells for $3.50 a kilogram.

There were no beginning inventories for April but ending inventories totalled 10,000 kilograms for paper and 12,000 kilograms for cardboard.

Required:

Prepare a product line income statement assuming that joint costs are allocated on the constant gross margin percentage method.

Answer:

Sales $330,000 $336,000 $666,000

Produced but not sold 27,500 42,000 69,500 Total sales value $357,500 $378,000 $735,500 Separable costs 224,000 264,000 488,000 Contribution margin $133,500 $114,000 $247,500

Joint costs 144,000

Gross margin $103,500

Gross margin % = $103,500/$735,500 = 14.072%

Sales $357,500 $378,000 $735,500

Gross margin @ 14.072% $50,308 $53,192 103,500

CGS $307,192 $324,808 $632,000

Separable costs 224,000 264,000 488,000 Joint costs allocated $83,192 $60,808 $144,000

Joint costs 144,000

Gross margin $103,500

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34) North York Statue Company makes miniature Mountie statues from cast iron. Sales total 40,000 units a year. The statues are finished either rough or polished, with an average demand of 60 percent rough and 40 percent polished. Iron ingots, the direct material, costs $6 per kilogram. Processing costs are $200 to convert 20 kilograms into 40 statues. Rough statues are sold for $15 each and polished statues can be sold for $18 or engraved for an additional cost of $5. Polished statues can then be sold for $30.

Required:

Determine the product mix for statues that allows maximization of the company's operating margin. Answer: Because of demand, make 24 per batch of rough (0.60 × 40). Because of higher profit margin, all polished statues should be engraved. The product mix should be 100 percent polished with engraving.

Rough Polished

Sales $15.00 $18.00

Cost of sales:

Materials ($6 × 20)/40 $3.00 $3.00 Conversion $200/40 5.00 8.00 Operating income (loss) $7.00 $10.00 Sales polished and engraved $30.00 Costs:

Materials $3.00

Conversion 5.00

Additional processing 5.00 13.00 Incremental income of processing further $17.00 Diff: 1 Type: SA